Is Pakistan Too Big to Fail?

The phrase "too big to fail" has gained currency in the United States to describe large and troubled financial institutions since the beginning of the banking crisis last year. The characteristics of such institutions include their large size and huge impact on the rest of the US banking system and the global economy at large.

Seen in the context of regional and global geopolitics, are there any parallels between the the large US banks and the Pakistani state? Let's examine this proposition in a little more depth.

Large Size:

In terms of its size, Pakistan is one of the largest countries in the world. With population exceeding 170 million, it is one of only eight nations armed with nuclear weapons. The nation ranks as sixth largest in population, seventh largest in its army size, 8th in number of mobile phone users, 10th in educated English speaking population, 10th in labor force size, 17th largest in number of Internet users, 26th in economy and 34th in land area.



Strategic Location:
Pakistan sits at the entrance to the oil rich Persian Gulf, and it shares borders with Afghanistan, Iran and the world's most populous nuclear states of China and India. Pakistan's Gwadar port is only 180 nautical miles from the exit of the Straits of Hormuz, considered extremely important for the flow of the bulk of world's demand for oil transportation from the Gulf nations. It provides convenient access to sea routes for many of the landlocked mineral-rich Central Asian states and Western China.

Pakistan has a 650-mile long coastline on the Arabian Sea, extending from India to Iran. In addition, some of the air and land routes between west and east pass through Pakistan because of its central location. Karachi and Gawadar have natural harbor ports serving as trading and re-fueling stop for ships.

Major Failures:

Not unlike the troubled US banks facing the prospect of certain failure, Pakistan also shows up at number 10 on the failed state index compiled by Fund for Peace and Foreign Policy magazine in 2008. However, in spite of the disastrous political leadership and extremely poor governance, the country’s saving grace is arguably its people. As the consequences sink in among Pakistan’s secular elite of the rising Taliban, there are signs that the country’s educated middle class – in Islamabad, Lahore and Karachi, cities rocked recently by continuing terrorist attacks – is losing its patience with radicalism. The urban middle class has more clout than many analysts think. It constitutes the backbone of the army, the business and professional classes and the opinion makers in the media. And the middle class is getting serious about its responsibility. They have now compelled the government into taking more decisive action.

Anger and Distrust:

Just like the US bankers who are getting bailed out at US taxpayers' expense, Pakistanis do not trust Uncle Sam, either. But, in spite of the widespread and deep distrust of the United States, the latest polls now indicate that 86 percent of Pakistanis agree that Taliban and Al-Qaeda militants pose a problem for Pakistan and more than two-thirds support a recent Pakistani army offensive against the extremists. Just as many US taxpayers are unhappy with the massive bailout of the US financial services, there is popular opposition to bailing out many troubled nations around the world. Just as people say that US bankers should have to pay for their own failures, there is a strong feeling that nations who have misbehaved should be made to pay for their mistakes.

Consequences of Failure:

The fear of contagion triggering national and global economic collapse was the chief reason why the US acted swiftly and decisively to prop up the failing financial institutions on Wall Street last year. The same "contagion" logic applies to Pakistan's potential failure which can lead to catastrophic consequences for Asia, the Middle East and the rest of the world, and seriously hurt American economy and strategic interests. If a nuclear-armed nation of 170 million people with a large military falls, then the millions of Pakistanis armed and trained to fight could spread out into the neighboring nations and beyond. This could be highly destabilizing and extremely dangerous for the global peace and prosperity.

Rewards of Success:
If Pakistanis, Americans, Europeans and the world make a commitment and do succeed in helping to bring peace and stability to Pakistan, then there can be an expectation of a significant upside for all. In 2007, analysts at Standard Chartered bank estimated that Pakistan has a middle class of 30 million which earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan's per capita GDP is approaching $3,000 per head. A peaceful, stable, and prosperous Pakistan has a lot to offer in terms of a large, well-educated, English speaking work force, a huge market opportunity for all sorts of products and services, and tremendous potential for global economic growth.

There is no guarantee of success if the world does make a serious commitment and starts making a long term investment in helping Pakistan, but failure is definitely not an option.

Here is British Writer William Dalrymple talking about India and Pakistan:



Here's another video clip from Intelligence Squared debate about Pakistan:



Here are two more video clips about Pakistan:





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Are Karachi Stocks Poised for Major Crash?

Karachi stock market is fearing the worst as the authorities contemplate removing an artificial floor of 9144 for KSE-100 imposed on August 27, 2008.

Karachi stocks have remained unscathed through the meltdown of major stock market indices around the world in the last few weeks. This has happened in spite of the precipitous drop in Pakistan rupee and the widely feared default on sovereign debt by Pakistan.

The reason why Karachi stocks have not suffered has nothing to do any "strong" fundamentals seen by astute investors. It is because of an artificial floor imposed on KSE-100 by the authorities. Fearing a complete meltdown of stock prices at Karachi Stock Exchange, Pakistan's Securities and Exchange Commission imposed a floor of 9144 for the market's benchmark KSE-100 index. The index closed at 9144 level on Wednesday, Aug 27, the day the KSE and SEC announced their decision to not allow the KSE-100 to trade below this arbitrary level. This extraordinary action, the first of its kind since the exchange opened its doors in 1948, came after investors pushed down the index to its lowest level in more than two years. Since this highly unusual action, the trading volume at Karachi has been extremely low. Daily trading volume dropped to a record low level last week to less than a million shares.


As a precaution before the KSE-100 floor is removed and to soften the blow for investors, the government is offering a Rs. 50 billion fund to bail out the shareholders. The fund will likely be used to offer "put options" worth Rs 30 billion to foreign investors. Pakistani stock brokers like the idea but they want at least Rs. 15 billion to cover losses by their Pakistani clients, according to media reports.

While Pakistan's Rs. 50 billion bailout package is laudable, it will be no more than a band-aid for a much more serious problem in Pakistan: Major loss of investor confidence. Unless the national leadership takes steps to get the economy on the right track and restore investor confidence, the rupee, the stock market and credit market and the whole financial system will continue to verge on collapse.

Can Pakistan Avoid IMF Bailout?

Pakistan may have to accept politically unpopular aid from the International Monetary Fund to ward off possible economic meltdown if wealthy nations turn it down, the government said Sunday.

Battered by high inflation and a plunging currency, nuclear-armed Pakistan needs up to US$5 billion to avoid defaulting on sovereign debt due for repayment next year.

Foreign Minister Shah Mehmood Qureshi said Sunday the "IMF was an option" but no decision had been made yet.

Shaukat Tareen, the finance official leading the country's efforts to secure the money it needs, said he was confident Pakistan would not default but that IMF aid may be needed as a "backup."

He predicted the country would soon receive more than US$4.5 billion through the acceleration of planned development loans and direct assistance from rich countries.

The crisis comes as the country's new civilian leaders struggle against Islamist militants in the northwest blamed for soaring violence at home and in neighboring Afghanistan.

Seeking help from the IMF would be politically difficult for the government because the agency's help is often on condition of deep cuts in public spending that can affect programs for the poor.

Pakistan hopes its front-line status in the war on terrorism will mean the international community will not have the stomach to see it default. But its plea for help comes as many countries are distracted by the global economic crisis.

President Asif Ali Zardari returned Friday from wealthy China with no public commitment of help.

Through much of its history, Pakistan has struggled with chronic economic instability and foreign debt, but the current crisis comes at an especially dangerous time.

The country has seen more than 90 suicide blasts since July last year.

Last month, a suicide bomber struck the Marriott Hotel in Islamabad, killing 54 and leading the U.N. and foreign embassies to withdraw the families of foreign staff.

Pakistan's overwhelmingly poor population of 160 million is already suffering from skyrocketing food and fuel prices and enduring daily power cuts caused by energy shortages.

Defaulting on debt risks shattering any remaining local and foreign investor confidence in the battered economy. It could escalate into an economic meltdown with out-of-control price increases, fewer jobs, more power shortages and a general breakdown in law and order.

"Bankruptcy, should it happen, could unleash a massive tidal wave of social unrest," the U.S.-based intelligence risk assessment agency Stratfor said in a report. "Exactly what the jihadists on both sides of the Afghan-Pakistani border would like to see to advance their goals."

The financial crisis was caused in part by the previous administration of President Pervez Musharraf, which subsidized fuel and food even as international commodity prices soared last year.

That created a huge hole in public finances, meaning the new government has had to borrow heavily from the central bank, stoking inflation that this month reached 25 percent.

The Pakistani rupee has lost about a third of its value this year. The benchmark 100-stock index had already fallen more than 40 percent from a record high in April when its board of directors put a floor under it at the end of August.

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Associated Press writers Stephen Graham in Islamabad and Ashraf Khan in Karachi contributed to this report.

Source: International Herald Tribune